Fannie Mae, Freddie Mac Don't Work
They were invited by the current administration, so you can bet that the fundamental underpinnings of such start here.
The argument for either more or less government involvement was lost on me, since the government -- via Fannie Mae and Freddie Mac -- are currently responsible for implicitly guaranteeing somewhere north of 90 percent of all mortgages today.
So it's a matter of gradually less and/or different levels of government involvement, done thoughtfully and over time. In other words, the GSEs aren't going anywhere, as they still represent stability to a fragile economy.
But before we move forward, we must look back. While history may not repeat itself, it sure does rhyme ... or something like that:
The "Implicit Guarantee" by Fannie Mae and Freddie Mac
The Profit Motive
The FHA served the subprime marketplace very well for a long time, using tried-and-true methods. We need to get back to these fundamentals and the FHA should lead the way again. (Related, but for another article at another time, is the ban on "yield spread premiums.")
The engineering of mortgage products became more and more exotic to fuel the demand of investors and consumers alike, and GreenPoint was an architect that served as a conduit to such products under the guise of innovation. While future innovations in this sector are vital, they cannot be to the detriment of a system that properly assigns risk. Rewards for any such innovations should stretch the life of the mortgage to better align objectives.
Without a solid understanding of the mistakes that were made, we're doomed to repeat them. I've identified three such mistakes that these panelists-turned-policy-influencers thought enough of to bring to this administration as fundamentally essential for change. In subsequent articles, I'll dive into some future-looking recommendations from the panel, such as: availability and cost of credit; assisting the under-served borrower; firming up the multifamily and rental market; as well as the potential for an expanded role of the private sector in the housing finance arena.
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